Panama in Focus
Market Overview
One of the fastest growing economies in Latin America over the past decade, Panama continues to enjoy a positive outlook. While the heavily services-based economy was severely affected by the outbreak of the Covid-19 pandemic in 2020 (with GDP contracting by 18%), it has since rebounded, thanks to high levels of foreign investment and strong activity in the mining and infrastructure sectors, although the country continues to be affected by significant wealth inequality, particularly between urban and rural areas.
Panama’s strategic geographic location and dollarised economy, along with the presence of the Panama Canal and 12 active free trade zones, mean it is an attractive jurisdiction for foreign direct investment, receiving one of the highest rates of FDI in the region. As a result, a hefty portion of Panamanian firms’ workload concentrates on advising on inbound investments and assisting prominent multinationals with establishing their regional headquarters in Panama, particularly in the Colón Free Zone and the Panamá Pacífico special economic area (this includes advising on the tax, labour, customs and immigration benefits available to these companies under the Multinational Company Headquarters (SEM) regime).
Since 2021, Panama has solidified its position as one of the first carbon-negative countries. This means its forests capture more carbon than the country emits, thus contributing to combating the climate crisis.
Additionally, Panama stands out as a crucial logistical and financial center in the region. Progress has been driven by trade and services, and the Canal plays a fundamental role in these sectors. Despite these developments, Panama remains one of the most unequal countries in the world, with significant poverty among indigenous peoples and Afro-Panamanians, and low quality and access to key public services. This underscores the need for a more equitable redistribution of resources.
In 2023, it is estimated that Panama experienced a growth of 6.5%, driven by several sectors such as construction, trade, transportation, tourism, the Colon Free Zone, and financial activities during the first three quarters of the year.
During the fourth quarter of the same year, Panama successfully exited the Financial Action Task Force (FATF) list of high-risk non-cooperative countries in the fight against money laundering and terrorism financing after implementing actions that strengthened its anti-money laundering and counter terrorism financing regime, which will bring positive economic benefits to the country in the medium and long term.
However, during the same period of the year, the country faced significant challenges, such as the decrease in ship traffic crossing through the Canal due to a prolonged drought caused by El Niño and social protests between October and November against an open mining operation. These protests led to the Supreme Court’s declaration of the contract with Cobre Panama as unconstitutional, resulting in the cessation of operations of the mining company later.
Due to the interruption of the operation of the cooper mine, growth is expected to decrease to 2.5% in 2024. However, the service sector’s dynamism is anticipated to contribute to medium-term growth gradually.
In the energy sphere, Panama’s status as one of only three officially carbon-negative countries in the world (along with Suriname and Bhutan) and its incentives for investment in clean energy sources make it a desirable location for the development of wind, solar, hydroelectric and biofuel projects.
The projects space has been another booming area for firms as the government has invested heavily in recent years in major public infrastructure projects, including the expansions of the Panama Canal, the Panama Metro and Tocumen International Airport. This is likely to continue following the introduction in 2019 of a law regulating public-private partnerships, which has opened up a promising source of new work – in July 2023 bids opened for the first PPP contract under the 2019 law (for the rehabilitation and maintenance of part of the eastern Pan-American highway) and numerous future projects are in the pipeline, as the government has plans for the repair of over 2,000km of roads. The project for the construction of a fourth bridge over the Panama Canal is also nearing a restart, after delays caused by the pandemic and the restructuring of its financing.
From 2025 onwards, accelerated growth is forecasted as long as Panama maintains its attractiveness as a foreign investment destination, which should initiate a modest decrease in poverty as the economy recovers and the labor market regains its pre-pandemic dynamism.
Although, Fitch downgraded its sovereign risk rating to BB+ from BBB- on March 28, 2024, and there is a downward pressure on the ratings of other agencies, the country still maintains good access to capital markets, though with a higher spread, thanks to its dollarized economy and a stable macroeconomic environment.
Starting on July 1st, the new administration will need to address key structural fiscal challenges to continue its growth path and sustain its robust fiscal outlook. These challenges include an urgent reform of the Pension Fund System and addressing climate disruptions, including the increasing frequency and intensity of El Niño, which poses significant risks through hurricanes and their effect on water levels in the Canal.
Last Updated: June 1, 2024
